Weighing the Election’s Impact
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Uncertainty was the name of the game for several months before Nov. 6, 2012. Investors and the American public at large waited for the election’s outcome to figure out which way the wind would blow on the business and financial fronts. Now that we’re facing a second Obama term, what will be the impact on commercial real estate? Will we go over the fiscal cliff? How will impending legislative expirations be addressed? Did the election resolve any issues, or are we destined to another four years of Congressional gridlock?
Jeff DeBoer, president and CEO of the Washington, DC-based Real Estate Roundtable, believes that while the election certainly set a tone and direction for problem solving, the major issues facing policymakers and the business in general are the same regardless of who won the election. “I’m not minimizing the election,” he says, “but the issues before people are not being put there by personalities, but by the facts of the deficit, the need for tax reform and things like that. While the election was a very important event, it didn’t really alter the risks and the challenges for our industry for the next several months. We have the same issues: how and to what extent real estate will be asked to contribute in the form of higher taxes—how this industry will be asked to contribute to tax reform and deficit reduction.”
David Johnson, CEO of Strategic Vision—an Atlanta firm that studies how and why consumers make buying decisions—concurs, saying the issues are still there and nothing has been resolved with the election. Despite all the talk of bipartisanship, he points out, the government and electorate remain divided. “Had the president been able to increase his majority from last time, he may have been able to claim a mandate, and you may have seen Republicans begin to cave in,” he states. “But there are too many people opposing what he wants. There’s no mandate. We really aren’t any better off now than we were before the election. I predict gridlock until 2014.”
Johnson sees the parties as more polarized than ever, with the newly elected senators and Congress members as even more extreme on either side than those in office before them. “The Democrats we’ve elected are far more liberal, and the Republicans are more conservative. I think had it gone in Mitt Romney’s direction, there might have been more resolution because he would have carried the Republican Senate with him and there wouldn’t have been a divided government.”
But Peter Cohan, president of management consulting and venture capital firm Peter S. Cohan & Associates in Boston, believes that the election results will alleviate gridlock in Congress due to political pressure on Republicans not to be obstructionist. “Republicans were under the illusion that they would be able to kick Obama out, and they failed,” he relates. “Things are pretty much the same as far as balance of power numerically, although perceived power of majority in the House has dropped. Odds are greater that if they do not reach an agreement on the fiscal cliff, they’ll be tossed out of the House and Senate at midterm elections.”
Johnson says that the threat of being ousted in 2014 will create a more conciliatory tone in Washington, since the politicians “will want to say they’ve gotten something done. Also, during the fifth year of a presidential term, the incumbent party usually begins to lose popularity, so they may want to reach a compromise so as not to see a catastrophic defeat.”
What of the Fiscal Cliff Now?
Without a doubt, nail-biting over the fiscal cliff still exists post-election, but more experts are of a mind that some sort of compromise will be reached. Cohan says that rather than risk being blamed for not resolving the issue, the Republicans will do a deal, “and a fog of uncertainty will be lifted. Companies with $9 trillion on their balance sheet will invest. It’s a good climate for investing: there are low interest rates, pent-up capital, more people with money in their pockets and more people getting jobs, so companies are taking more space, which is good for commercial real estate.”
But just what that compromise will encompass is still a mystery. “To suggest that there’s a clear vision on how to address the fiscal cliff coming from Washington now—it hasn’t clarified itself yet,” says DeBoer. “There may be a short-term extension for the cliff, or a bridge for the cliff, or maybe we’ll go over the cliff itself. All of these options are on the table, and people are figuring out how to address that. There’s no clear path forward: every day we get closer to the cliff and the pressures mount to get over it.”
All of which corroborates the theory that all is business as usual since the election. But one thing that did distinguish this election from 2008 is that Obama’s margin was not as great. “If you consider the House election results and the fact that President Obama was the first president to be reelected who saw his popular vote go down, you realize he doesn’t have a mandate like Ronald Reagan or Bill Clinton could claim,” says Johnson. “We are as a nation more evenly divided and more polarized than we were before. Compromise, to more voters on both sides, seems like a dirty word.”
Johnson interprets this to mean that uncertainty is still there, especially with regard to the fiscal cliff. “Mitt Romney appeared to be repudiated, but it was really his tin ear vs. Republican philosophy that was repudiated. There might be some kind of compromise cobbled together, but it’s not going to be anything comprehensive.” There’s nothing certain to be seen until 2014, around the midterm elections, he notes. “If the Democrats make headway in the Senate, the Republicans will compromise, but if not, they won’t. And the Democrats are going to see that they’ve got to compromise if the Republicans continue to gain ground.”
Cohan’s hunch is that the parties will come up with some sort of deal regarding the fiscal cliff, particularly based on the way the stock market rallied after plummeting post-election. “People like American economist Tim Geithner say we have a deal: the stock market went up and Congress went on recess. The fact that it went up means they believed what Geithner was saying. I remember in 2008 when they were working on TARP, and it didn’t pass. The market’s used to deals falling apart in Washington—they assumed deals were going to pass and they didn’t. So I don’t think we’re going over the fiscal cliff.”
What Legislation Does CRE Need?
In discussing the rewriting of tax law, DeBoer makes the case that some provisions for the real estate industry need to be added in a positive way. “What will be the policies that will create jobs, encourage business investment and investment in real estate? What about future extensions of credit? How do we get building owners to create more efficient buildings?”
DeBoer says his group is focused on a set of policies that will incentivize building owners to be more energy efficient. “There are some tax programs on the books now with some rough edges that make them not as useful as they could be. If buildings could be 10% more energy efficient, it would put about $20 billion into the pockets of small businesses. They could hire more people and expand.”
This issue also resonates with Cohan. “Global warming is putting people’s lives in danger,” he says. “That’s something that has growing popular support, particularly on the East Coast. I recently heard on the radio a poll of people affected by Superstorm Sandy. Almost every one of them believes it happened because of global warming. The odds that some kind of legislation would pass requiring building owners and users to reduce their consumption of fossil fuels is likely, and it would be very popular.” But, he adds, whether there’s an attractive return on that investment remains a question.
Also popular, the experts believe, is an extension of the Patriot Act. “There was a terrorism risk-insurance program put in place after 9/11 that expires at the end of 2014,” says DeBoer. “We need a big effort to make a case for why this program is needed.”
Cohan agrees that the Patriot Act won’t change. “My hunch is that if you were to do a temperature check of American policy, you’d find that we’re not ready to loosen up on American terrorist issues. The government can still spy on people, but I don’t know to what extent it’s really happening. If it could keep us from getting another terrorist attack, it would be worth it. The political attitude would affect that legislation as well. But, on the other hand, lobbyists can do all sorts of things nobody knows about.”
DeBoer also points out that legislation encouraging foreign investment in US assets would be beneficial. “We continue to think that it would be positive for real estate and for the economy if Washington found a way to encourage more foreign-equity investment into commercial real estate in a responsible way,” he states.
In the regulatory world, the issue of Basell III—a global regulatory standard on bank-capital adequacy, stress testing and market liquidity risk to be introduced between 2013 and 2018—and whether it discourages bank lending is also important, as is the issue of what are the right depreciation and capital-gains rules.
“These are all monumental issues facing the country and our industry,” says DeBoer. “This is the time for our industry to act like an industry, to be focused the way an industry should be focused and talk with a more united voice on all of these issues.”
He adds that many of these issues could be resolved over the next six months, but they may also be kicked down the road. “These are all ingredients to bake the cake, and it all could be positive or negative depending on how much or how little of each is put into the mixture,” he explains. “All of these things could very well be debated and put into a big package in the next three, six or nine months, but we have to focus on them and make our case.”
DeBoer stresses the importance of real estate professionals to participate fully in whatever trade association they’re involved in, “and they need to urge that trade association to be as active and as focused in a big-picture way as possible in Washington. If the industry works together, we can meet all of these challenges and have positive results.”
He also believes that the industry needs to continue to make a case about why positive policies of real estate investment are important to our economy. “At times like this, we think it’s better to stay focused on our industry and how it contributes to the overall economy instead of getting involved in very big policy issues that cause us to lose focus on our own goals and our own issues. We’re going to focus on the importance of real estate and continue to talk about that: how real estate can be a positive contributor to debt reduction and tax reform. We don’t want to be a negative contributor.”